1. Big mortgages:
Homeowners with a sizable mortgage used to acquire, build or substantially improve their primary residence or a second home can generate enough in ongoing interest deductions to exceed the standard deduction thresholds.
Notably though, in an environment where mortgage interest rates have long hovered around 4%, it still takes a very sizable mortgage balance to actually generate enough interest to trigger itemized deductions, especially since it’s only the interest portion of the mortgage payment, not the entire mortgage payment, that is deductible. For an individual, generating a $12,000 mortgage interest deduction at 4% would require at least a $300,000 mortgage; for a married couple the trigger is a $600,000-plus mortgage.
2. Big, ongoing charitable deductions:
For higher income individuals it’s not uncommon for annual charitable giving to top the $12,000/$24,000 standard deduction thresholds. And at higher income levels the charitable deduction AGI thresholds are not an impediment to exceeding these targets. Of course, giving away money just to get a tax deduction isn’t necessarily a net positive, as the household still gives more away than it receives back in tax benefits. Still, for those who already engage in sizable, ongoing charitable giving, sustained charitable giving alone can support ongoing itemized deductions.
3. Big SALT deductions:
One of the unique peculiarities of the current tax planning environment is that when TCJA imposed a maximum cap on SALT deductions, it imposed the same cap of $10,000 for both individuals and married couples. This is significant because the standard deduction threshold for individuals is only $12,000, while it is $24,000 for married couples.
This means maxing out the $10,000 SALT deduction is at best only part of the way to the $24,000 threshold for married couples, but gets an individual almost all the way to their $12,000 threshold. Still, it takes a sizable income with the associated tax deductions or a big home with substantial property taxes to reach the individual threshold. Assuming an average state income tax rate of 5% and a 1% property tax rate, reaching the SALT cap still typically requires around a $100,000-plus annual income and a $500,000-plus property, or for those who rent, a $200,000-plus annual income.
4. Big margin investing:
While mortgage deductions are limited as to the amount of debt principal on which interest can be deducted, investment interest is limited only by the amount of interest and dividends generated by the investments themselves and that the interest be taxable — i.e., no investment interest deductions for municipal bonds.
As with the mortgage interest deduction though, generating sufficient interest requires a substantial amount of debt principal. On the other hand, since margin interest rates tend to be higher — currently averaging around 8% — it doesn’t take quite as much debt principal, potentially just on the order of $150,000 for individuals or $300,000 for married couples.
5. Big long-term care events:
Most medical events are covered by health insurance, and while individuals may still have to pay a non-trivial deductible, coverage is usually sufficient to prevent medical expenses alone from triggering the $12,000/$24,000 thresholds, particularly on an ongoing basis.
However, long-term care insurance is adopted far less often than health insurance, and tends to have much larger annual expenditures, whereas semi-private care alone averages $225 per day or over $80,000 per year. Those who have an ongoing long-term care event consequently often trigger more than enough in annual medical expenses — over and above the 10%-of-AGI threshold — to trigger ongoing itemized deductions.
6. Big, IRD-eligible stretch IRAs:
One of the largest and most commonly overlooked itemized deductions is the Income in Respect of a Decedent, or IRD, deduction, which provides beneficiaries of inherited retirement accounts and other inherited pre-tax assets an income tax deduction for any Federal estate taxes that were caused by that IRD asset.
This means the IRD deduction is only available to those who inherit a pre-tax asset like an IRA from someone who actually paid a Federal estate tax — which isn’t many, given the sizable Federal estate tax exemption. Nonetheless, with a top Federal estate tax rate of 40%, those for whom the IRD deduction is available effectively receive an itemized deduction for 40% of their inherited IRA withdrawals.
This in turn means inheriting a big IRA from a big estate can trigger a big IRD deduction and, therefore, ongoing itemized deductions. It will still take an IRA of $1 million or more for an individual, or of $2 million or more for a married couple to generate enough in IRD deductions to claim ongoing sustained itemized deductions — assuming the stretch IRA faces an annual RMD of only about 3% per year.